Georgia Simplifies Business Sales Taxes, Sees More Investment

Georgia is already seeing benefits from a tax reform bill Gov. Nathan Deal (R) signed into law in April.

The new law provides a comprehensive modernization and streamlining of sales tax exemptions for businesses, particularly the mining, manufacturing, and agricultural industries. Deal said two big investments in Georgia can be attributed to this rationalization of sales taxes on business inputs.

The reforms “played a critical role . . . in Georgia’s successful wooing of Caterpillar,” said Deal. Caterpillar, headquartered in Illinois, is the nation’s largest heavy-equipment manufacturer. The company is investing $200 million to move a tractor and excavator manufacturing plant from Japan to Georgia. The move is expected to create 1,400 jobs at the plant alone.

Two weeks later, Baxter Pharmaceuticals announced a $1 billion manufacturing investment that will create 1,800 skilled jobs in Georgia. Within that same period, at least four other companies completed arrangements to move to Georgia, adding approximately 700 new jobs. Officials at all those companies indicated failure to pass tax reform and bring clarity and consistency to the taxation of business inputs would have been a deal breaker.

Reform ‘Lite’

The Special Council for Tax Reform and Fairness for Georgians that legislators created recommended a comprehensive set of pro-growth tax reforms in 2011 centering on substantial cuts in Georgia’s 6 percent income tax rate. Legislators last year rejected the income tax rate cut and comprehensive pro-growth tax reform. This year a clever assemblage of politically attractive components—but less comprehensive than the 2011 recommendations—passed with strong bipartisan support.

Supporters argued this year’s tax reform bill would help families, attract companies to invest in Georgia, and improve the competitiveness of businesses already in the state. The pieces were assembled so that fiscal scoring showed the law as an overall tax cut.

Even supporters of the reforms have been surprised at the almost immediate effect on economic growth and job creation from a law that did not cut income tax rates.

Clarity, Transparency, Simplicity

The pro-business and competitiveness parts of the new law are based on the principles that taxes should not be imposed on business inputs and the tax code should be clear, transparent, and simple.

Georgia’s tax code evolved over the decades to improve competitiveness in selected industries. In nearly all cases, those amendments successively exempted production inputs from sales tax in key industries. The tax code had become a patchwork of specific rules for business inputs that would or would not be exempt from the state’s 6 to 8 percent sales taxes. Until April, that code still contained reference to steel-wheeled tractor tires. Energy to heat chicken houses was exempted or not depending on whether the heat came from electricity or natural gas.

These outmoded codes were draining manufacturing jobs from the state, and the new law is intended to reverse that, condensing hundreds of code items into a few. These few basically exempt from sales tax items used in the business of mining, manufacturing and agriculture. Particularly important is the elimination of tax on energy used in manufacturing production.

As a result of the reforms, the owner of a small business who provides plants to hotels and office buildings in Atlanta will no longer have to keep 17 different tax exemption certificates updated annually in each of her suppliers’ files. She will have one certificate, laminated, and in her wallet.

Pro-Growth Simplicity

The lesson is that reform that cuts red tape and reduces the cost of tax compliance is very much ‘pro-growth.’

Last year, when Georgia tried to reduce income tax rates, there was no direct proof of how much growth would actually be stimulated by lower rates. Next year, policymakers will have direct evidence of the sensitivity of business formation to changes in the tax code. The state will also have more employment and higher tax revenues.

Those Georgians who want the state to join the ‘no income tax club’ are seeing this year’s ‘reform lite’ as one of the best warm-up acts we could have designed.